Dividend nil rate and dividend tax credits consultation on draft clauses 2 & 3 Finance Bill 2016
Clause 2 introduces a new dividend allowance, which will apply to the first £5,000 of an individual’s dividend income. The allowance will operate as a 0% tax rate inserted into the Income Tax Act 2007 (ITA 2007). The new rate will apply for tax years 2016‐17 and subsequent tax years.
Clause 3 abolishes the dividend tax credit. The new rules will apply to dividends paid (and other distributions made) on or after 6 April 2016.
In their responses the CIOT and LITRG recognise that the replacement of the dividend tax credit with the new dividend allowance will represent a small tax reduction for taxpayers who have small amounts of dividend income - but there will be exceptions. HMRC’s own estimate is that 200,000 more individuals will pay tax on their dividend income as a result of these measures, a not insignificant number. Both CIOT and LITRG ask that HMRC ensure that appropriate and clear guidance is published in advance of 6 April 2016 to help taxpayers understand how the new regime will affect them, whether they might need to rearrange their affairs and what action they might need to take to ensure they comply with their tax obligations under the new regime.
It is unfortunate that the terminology used has the potential to lead to confusion about how the new dividend allowance operates. Rather than being a tax free allowance, like the main personal allowance, it is in fact a nil-rate band. Dividend income that is within the ‘allowance’ will still count towards an individual’s basic and higher rate limits. Therefore it will still affect allowances and charges which are dependent on whether an individual’s income crosses a particular threshold, for example, the High Income Child Benefit Charge (£50,000) and the personal allowance income limit (£100,000). It will also affect the rate of savings allowance that they are entitled to. It is likely that this will be very confusing for the 2 million taxpayers who will still be paying tax on their dividend income after the measure is introduced. The CIOT and LITRG both suggest that it should be renamed in the legislation to make it clearer that it is not an allowance in the widely understood sense of the word.
There will be an impact on some individual taxpayers who make charitable donations, as the removal of the dividend tax credit may mean that they no longer pay sufficient tax to cover the tax attributable to their gift aid donations, and would be liable for the shortfall. This would be particularly iniquitous to donors with small incomes. We ask whether it would be more reasonable for a notional credit to be maintained in relation to donations made by taxpayers whose income is insufficient to cover the tax reclaimable by charities.
Trustees and personal representatives do not receive either the dividend allowance or the savings allowance and will remain liable to the trustee or standard rates applicable in full on the relevant category of income. However the abolition of the dividend tax credit applies regardless of the status of the recipient. All trustees and personal representatives will face an increased compliance burden in cases where a return would not have been required previously because the 10% dividend tax credit satisfied all liability in respect of the dividend income. There is strong argument for raising the figure for informal settlement, so as to minimise compliance costs.
The CIOT’s full response can be found at here.
LITRG’s response can be found at here.
The ATT also submitted comments on Clause 2 to HMRC raising a number of similar points to CIOT and LITRG. As the ATT submission was also submitted in evidence to the Finance Bill Sub-Committee, which requests that evidence remains unpublished until accepted as evidence, the ATT response is not at the time of print available to read on our website. However, it will be available to read on the Technical pages, under ‘Submissions’ in due course.